LAKEVILLE, Minn. -- Tobacco is historically a highly regulated category. But there is more activity in the space now than usual, said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO), Minneapolis.
“You have corrective statements, you have the graphic warnings, you have the PMTAs [premarket tobacco applications]—everything is coming at once,” said Briant, a 20-year NATO veteran. “And now you have COVID-19, so that means on the state level [there are] tax increases and potential flavor bans.”
Additionally, it has also been more than a year since the U.S. Food and Drug Administration (FDA) banned the sale of flavored cartridge-based electronic-cigarettes—except for tobacco and menthol flavors—posing more regulatory challenges to retailers.
For retailers, concerns vary based on geography and proposals put forward by local legislators and regulators. Kevin Harder, tobacco and car wash category manager at Yesway/Allsup’s convenience stores, said potential tobacco flavor bans and a proposal that would increase the power of county and city governments in New Mexico to add new taxes and regulations on tobacco products top his concerns. West Des Moines, Iowa-based BW Gas & Convenience Retail, doing business as Yesway, acquired Clovis, N.M.-based Allsup’s and its 304 stores in Texas, New Mexico and Oklahoma in 2019.
“Not only would our sales take a huge hit, but tax revenues would decline as users would seek to obtain their flavored products in nearby states, on the internet or through illegal means,” Harder said of the effects of a potential New Mexico flavor ban.
From a flavor ban to the FDA's decisions on PMTAs and cigarette warning label mandates, CSP spoke to industry watchers about what the top regulation concerns are for tobacco retailers.
Flavor Ban Updates
Of all tobacco regulation, banning flavors tobacco and vape products—or the potential of such bans—are what’s most concerning to Harder and Beth Reina, director of marketing with Fremont, Calif.-based Vintners Distributors.
Flavor bans target roughly 24% of the cigarette category, 60% of the moist-snuff category and a significant portion of cigars for Yesway/Allsup’s, Harder said, so restrictions would take a big hit on sales.
There are no current bills proposing a statewide flavor ban in New Mexico, but just the potential for one concerns Harder. Further concerning to him are bills introduced in the New Mexico House and Senate that would give municipalities and counties further power to regulate tobacco.
“Local tax and regulatory authority would create a patchwork of regulations that are different within relatively small geographical areas which would add complexity to our business as we try to operate legally within the framework of all the added laws,” Harder said.
Other states and localities also face potential flavor bans, and Massachusetts stands as a leading example of the results.
Massachusetts’ flavored tobacco sales ban—including menthol cigarettes—took effect in June. The New England Convenience Store and Energy Marketers Association (NECSEMA) said excise tax losses from menthol cigarettes amounted to more than $10 million per month during the first six months of the ban, in addition to hurting c-stores’ bottom line.
California may suffer a similar fate, an issue that now sits in voters’ hands.
While the state legislature and governor approved the ban in August, more than 1 million registered voters in the state, a few hundred thousand more than needed, signed a petition to force the issue to be decided by referendum. This means the law will be postponed until the November 2022 election.
The California Coalition for Fairness led the initiative.
Regardless, Reina of Vintners Distributors is still concerned. The company has more than 130 Loop Neighborhood c-stores in California.
“I am glad that we got the referendum, but unfortunately I think that the statewide flavor ban will eventually pass,” she said. “More and more cities and counties are enacting local tobacco regulation.”
About 36% of Vintners’ stores are affected by some form of local regulations, Reina said. Menthol flavors are about 35% of the tobacco category, she said, and data shows that some consumers are switching from menthol to regular tobacco in areas where flavor restrictions are in place.
Reina sees some hope with alternative forms of nicotine delivery and has reduced the space allotted to cigarettes to expand on these alternatives.
Corrective Statement Lawsuit
A more than 20-year-old lawsuit is expected to make its way back into court this summer—and repercussions to c-stores could be great if the outcome isn’t what NACS and NATO are advocating for.
In 1999, the U.S. Department of Justice (DOJ) brought a lawsuit against several cigarette manufacturers regarding statements made by the companies about cigarettes and smoking. Those manufacturers were ordered to air advertisements with corrective statements, among other reparations. Since then, manufactures have published messages warning cigarette users that cigarettes can causes cancer, the dangers of secondhand smoke and more.
One item of the order that required manufacturers to place signs with corrective statements on store counters of retailers who sold those products is still being considered.
The DOJ’s proposal said that Altria, Philip Morris USA, R.J. Reynolds Tobacco Co. and ITG Brands should be required to display 18 different point-of-sale messages in retailers that are under contract with one or more of these manufacturers, said NATO’s Briant. The signs would stay for at least two years.
“We continue to be very concerned about that because retailers haven’t done anything wrong,” said Doug Kantor, counsel for Alexandria, Va.-based NACS, adding that he fears the signs would lead customers to believe the c-store was at fault.
Kantor and Briant expect the matter to come up again at a hearing scheduled for July.
COVID-19 Tax Increases?
Unlike the federal government, which can incur budget deficits, states are required to approve balanced budgets every year. With much dining out and ancillary shopping stalled by the pandemic, many states expect budget shortfalls this year. For some, the resolution may be new or increased tobacco taxes, Briant said.
New York, for example, proposed an increase to its tax rates for tobacco products, and more are expected.
“A month from now, the landscape will probably look a lot different with many more bills, but so far we’ve just seen the New York bill come across. There will be others,” Briant said. “Usually, we see about 20 to 24 states in any given year introduce bills to raise cigarette or tobacco product tax rates. We have an expectation that will be higher this year because of the budget deficits across the country.”
When legislation like that differs by state, it can be tough on c-store retailers with stores in multiple states to navigate, Kantor said.
“State differences in those taxes can always cause some dislocation and problems because if there’s a significant price difference crossing a border, there’s all kinds of questionable and or illegal activity that can happen with respect to sales of those tobacco products and distribution of them,” he said
Retailers continue to wait for a public list from the FDA on which tobacco-product manufacturers they received PMTAs for by Sept. 9 and which deemed tobacco products missed the deadline.
As of mid-February, the FDA had completed the processing step for all exemption from substantial equivalence requests (EX REQ) and substantial equivalence (SE) reports submitted to the agency by Sept. 9, 2020; however, that step is ongoing for PMTAs, or the third pathway for manufacturers to market new tobacco products.
Data on the EX REQ and SE applications, including how many were accepted or rejected and which companies submitted products, is available on a new FDA webpage, Mitch Zeller, director of the FDA’s Center for Tobacco Products (CTP) said in a Feb. 16 memo. The agency has not yet released the same data for PMTAs, which is the path most e-cigarettes were filed under.
Retailers should know, though, that while a public PMTA list will help give clarity to c-store retailers on what tobacco products they can legally sell, it’s not an end-all, be-all, Briant said. The product manufacturer must authorize that the FDA can make the status of their application public before sharing it, and some tobacco products may be grandfathered in the system, he said.
“They have to investigate a little bit further beyond just the list when it’s published to see if their product can be sold legally or not,” Briant said of c-store tobacco category managers.
Since manufacturers that have filed PMTAs can continue to sell their products for up to a year, the impact of the process on the tobacco category remains to be seen, Kantor said.
“We still haven’t seen the list, which is frustrating, because it’s just a basic good management thing to let everybody know and be transparent about what’s going on,” Kantor said. “My sense is that, while it has been more difficult, that folks in the industry have found ways to figure it out as best they can to try to comply.”
Cigarette Warning Labels
Retailers have more time to file graphic cigarette health warning rotational plans with the FDA.
The new effective date of the rule is April 14, 2022, three months later than the previous deadline of Jan. 14, 2022, a notice on the FDA’s website said.
The FDA is encouraging retailers to submit cigarette plans by June 14, and it intends to revise its relevant guidance documents related to the rule with the new effective date.
The new rule will require 11 new health warnings to be implemented on cigarette packs, cartons and ads. The warnings include text statements and graphic color images.
Kantor said this is something NACS is watching. Litigation on a similar rule was previously struck down, he said, and there are several pending lawsuits challenging it.
“We’ll see how it gets resolved and whether the FDA has been able to deal with the problems that the court pointed out with their last proposal,” he said.